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In a rare inside look into the rarefied world of hedge fund dealings, a federal jury in Manhattan has found billionaire investor Raj Rajaratnam guilty of fraud and conspiracy. A juicy and far-reaching detail in the case: Former McKinsey director Anil Kumar (picture) and two other McKinsey consultants helped the Galleon Group founder with stock tips based on insider information. How can such dirty deals by consultants be prevented?
When federal agents arrested Raj Rajaratnam at his Sutton Place apartment on Manhattan’s East Side in October 2009, the government had placed him at the center of a vast insider trading conspiracy.
Rajaratnam stood accused of using a corrupt network of tipsters to gain about $63 million from illegal trading in stocks including Google and Hilton Worldwide.
The case has since ballooned to insider trading charges against 25 defendants—21 of whom have pleaded guilty—including former executives at IBM, Intel and Bear Stearns.
In the trial, Raj's brother Rengan Rajaratnam, who had not been criminally charged, emerged—through wiretapped conversations—as a colorful figure.
On a call in August 2008, Rengan had told Raj about his efforts to press his friend, a McKinsey consultant, for confidential information.
Rengan called the consultant “a little dirty” and boasted that he “finally spilled his beans” by sharing secrets about a corporate client. (According to the government, the McKinsey consultant was Palecek, a classmate of Rengan Rajaratnam.)
A second McKinsey official, Rajat Gupta, was also named at the trial. Prosecutors said in opening statements that Gupta, the former worldwide director of consulting firm McKinsey, leaked tips to Rajaratnam about Goldman Sachs.
Gupta denies wrongdoing and hasn’t been criminally charged.
A third consultant, former McKinsey director Anil Kumar, was implicated in the insider trading scheme (see video).
In his testimony yesterday, Kumar said he worked closely with top officials at Advanced Micro Devices in late 2005 and early 2006 as the company worked to acquire Nvidia Corp. and then ATI, whose graphic computer chips would complement AMD’s.
Rajaratnam stood accused of using a corrupt network of tipsters to gain about $63 million from illegal trading in stocks including Google and Hilton Worldwide.
The case has since ballooned to insider trading charges against 25 defendants—21 of whom have pleaded guilty—including former executives at IBM, Intel and Bear Stearns.
In the trial, Raj's brother Rengan Rajaratnam, who had not been criminally charged, emerged—through wiretapped conversations—as a colorful figure.
On a call in August 2008, Rengan had told Raj about his efforts to press his friend, a McKinsey consultant, for confidential information.
Rengan called the consultant “a little dirty” and boasted that he “finally spilled his beans” by sharing secrets about a corporate client. (According to the government, the McKinsey consultant was Palecek, a classmate of Rengan Rajaratnam.)
A second McKinsey official, Rajat Gupta, was also named at the trial. Prosecutors said in opening statements that Gupta, the former worldwide director of consulting firm McKinsey, leaked tips to Rajaratnam about Goldman Sachs.
Gupta denies wrongdoing and hasn’t been criminally charged.
A third consultant, former McKinsey director Anil Kumar, was implicated in the insider trading scheme (see video).
In his testimony yesterday, Kumar said he worked closely with top officials at Advanced Micro Devices in late 2005 and early 2006 as the company worked to acquire Nvidia Corp. and then ATI, whose graphic computer chips would complement AMD’s.
Rajaratnam's company Galleon paid Kumar $250,000 annually for secret tips. Kumar said he regularly briefed Rajaratnam on the status of the talks with ATI, which intensified after the Nvidia deal collapsed, Kumar said.
“I told him this was red hot and not to be discussed with anyone,” Kumar testified.
Kumar said he told Rajaratnam that ATI would be acquired for about $20 or $21 a share, while it was then trading at about $16.50.
“He said, ‘Are you absolutely sure?’ Kumar said. “He said, ‘Wow, this is very useful.’”
Kumar said Rajaratnam wanted to stop paying him $250,000 per year and instead compensate him based on Galleon’s profit on illegal trades. Kumar refused, saying he wanted to retain the fiction that he was providing consultant services.
“I thought a consultant arrangement was more appropriate,” Kumar testified. “Seeing that shares were being bought seemed more like a crime to me.”
So Kumar knew that his dealings with Rajaratnam were both unethical and illegual. But he did nothing to stop them.
Ultimately, Kumar told Rajaratnam to pay him at year’s end whatever Rajaratnam thought Kumar’s tips were worth. That, said Kumar, was “standard practice” at McKinsey for lawful consultant work.
“I thought a consultant arrangement was more appropriate,” Kumar testified. “Seeing that shares were being bought seemed more like a crime to me.”
So Kumar knew that his dealings with Rajaratnam were both unethical and illegual. But he did nothing to stop them.
Ultimately, Kumar told Rajaratnam to pay him at year’s end whatever Rajaratnam thought Kumar’s tips were worth. That, said Kumar, was “standard practice” at McKinsey for lawful consultant work.
What do you think? Given that consultants are often privy to strategic intelligence or insider information, how can insider trading be prevented? (For example, my company has explicit rules forbidding consultants to use material information from clients for personal gain.) I look forward to reading you on http://thomaszweifel.blogspot.com/.
P.S. For a free copy of my new e-book Leading Leaders: The Art and Science of Boosting Return on People (ROP), go to Leading-Leaders.
Kumar wanted to launder his cut by receiving 'consulting fees'. Commonly referred to as 'wetting his beak'.
ReplyDeleteAlternatively, by accepting a 'percentage of the action' he'd be a Partner in Crime.
These guys are so dirty that they leave a stink.
So, to answer the question that you posed: "How can such dirty deals by consultants be prevented?"; my suggestion is to get a whif of the consultancies that try to get into bed with you. The diseases that they carry really do have an odor about them. Use the Smell Test to be safe.